Abstract: We study how a broker provides liquidity to an informed trader and to a noise trader. The broker decides how much of the flow she keeps in her books (i.e., internalisation) and how much she unwinds in an exchange (i.e., externalisation). We frame the interactions between the broker and traders as a Stackelberg game. The informed trader knows the stochastic process that drives the drift of the asset price. The order flow of the noise trader is uninformative. We obtain the broker's internalisation and externalisation optimal strategy in closed-form. We show the performance of the broker, the noise trader, and the informed trader for a variety of scenarios. Lastly, we compute the amount of transaction costs that the broker needs to charge to break even.

Unless otherwise specified, in Term 2 and Term 3, the Stochastic Finance seminar takes place on Wednesdays, starting at 11:00 am.

While the seminars will run in person, there is also the possibility to join via MS Teams. If you wish to be added to the respective Team, please contact the seminar organiser Miryana GrigorovaLink opens in a new window.

All are welcome.